“What people should do is look at the 1890s, which was caused by a housing land boom,” former bank chief and chair of the 2014 Financial System Inquiry David Murray warned.

“To say it won’t happen and simply ignore it is wrong.”

Many people think of the 1930s as Australia’s most dire depression, but talk to historians and they’ll tell you that the worst one was 40 years earlier. On the back of the gold rush, the economy had been booming through the 1880s. Funds were pouring in from British investors keen to develop land, particularly in Melbourne.

A city block in what was then being dubbed “Marvellous Melbourne” almost doubled in value in just a couple of months in late 1887, while the average price of land in Sydney is said to have increased by more than 80 per cent from 1880 to 1884.

Population growth was roaring along at between 3 and 4 per cent.

“It was a dramatic transformation,” says Dr Nigel Stapledon, a real estate research fellow at the Centre for Applied Economic Research at the University of NSW.

Many of the British investors had no idea they were sinking funds into an already flooded land market.

“They were fairly ill-informed … so quite a few Australians took them for a ride,” says Dr Stapledon. “There was a huge amount of land development and then it took decades to actually absorb it.”

A key trigger for the 1890s crash in Australia was a collapse in population growth “to next to zero”, says Dr Stapledon, who argues that in 2017 Australia is not likely to see a similar drop off in immigration.

“The orders of magnitude are just very different,” he says.

While there are parallels today to the 1890s – particularly the number of investors speculating on the market – economist Saul Eslake agrees that it’s “not obvious … that the 1890s experience is necessarily going to replicate itself”.

“It would be foolish to say it couldn't happen,” he adds, “but that’s different from saying it’s likely to happen. And – in particular – that it’s likely to happen soon.”

How to spark a collapse in property prices

Eslake says three conditions would need to be present simultaneously to cause Australia’s red-hot East Coast housing market to suck the nation into an 1890s-style catastrophe:

a trigger that gives buyers and property owners cold feet, such as a sharp rise in interest rates, soaring unemployment or a severe cut in immigration

a large number of forced sellers who can no longer pay their mortgages

an oversupplied property market

“You need to ask yourself how likely is it that any of those things might happen, let alone all three at once?” says Eslake.

“It’s possible to imagine some potential triggers if the government makes silly decisions, but by and large I think Australia is not in the same place as, for example, the US, Ireland or Spain were 10 to 12 years ago [when property prices plummeted in those countries in the wake of the Global Financial Crisis].”

The financial market today also looks vastly different from that operating in the 1890s. The number of building societies and finance companies had exploded during the preceding decade, and their share of financial system assets rose from 12 per cent in 1885 to more than 21 per cent by 1892. They were the first to go when the crisis hit.

Not only are there fewer institutions in the modern day, there are also better consumer guarantees. “We had no system of deposit insurance back then,” says Eslake. “Banks were worried that customers would take all their money out and therefore they would be calling in loans.”

Australia’s household debt is high – and rising

It is widely acknowledged that in recent years the East Coast property market has helped Australia achieve a soft landing from the cooling resources boom, but there are concerns that the market – particularly in Sydney and Melbourne – has finally overshot, that the much-talked about property price bubble has become a reality.

Median prices in Sydney rose 13.1 per cent in 12 months to the end of March 2017, while in Melbourne they shot up 15.2 per cent. Not every market was hot, though – median prices in Perth fell 3 per cent in the same period.

In April 2017, Reserve Bank governor Philip Lowe noted the level of household debt in Australia is high and still rising.

“Over the past year the value of housing-related debt outstanding increased by 6.5 per cent,” he said.

“This compares with growth of around 3 per cent in aggregate household income.”

However, Lowe added that “arrears rates remain low and many households have built up sizeable buffers in mortgage offset accounts.”

The vulnerability of mortgage holders is also on the radar of the Australian Prudential Regulation Authority (APRA). APRA has warned lenders it is keeping a close eye on the serviceability assessments of new loans, and has flagged it will seek to reduce the number of loans that are interest-only from 40 per cent of all new loans to 30 per cent.

Are house prices likely to crash?

While some potential home buyers might be praying for a sudden crash in prices to improve affordability, Saul Eslake says that wouldn’t be desirable.

“You wouldn’t want to solve Australia’s housing affordability problem the way the Americans did,” he says.

“The best way to solve it would probably be to have an extended period where house prices were flat and incomes grew rapidly. It would be a good thing if we had a gradual deflation of house prices.”